Live blog of Bernanke’s second day of testimony before Congress

February 27, 2013, 9:30 AM ET

Hello and welcome to MarketWatch’s live blog of the second leg of Fed Chairman Ben Bernanke’s report to Congress on the economy and monetary policy. MarketWatch’s Greg Robb brought you live updates as they happened.

In the first day of testimony on Tuesday, Bernanke gave his full-throated support for continuing the central bank’s $85 billion per month bond-buying program. He also called for Congress to replace the sharp automatic spending cuts – also known as the sequester – saying that the lower spending would have a significant negative impact on the economy.

Markets breathed a sigh of relief on Tuesday that Bernanke gave no hints he wanted to scale back the asset purchases. At some stage the Fed may want to taper the size of the purchases, economists say, but that won’t happen until they know for sure how much the budget morass in Washington will drag down growth this year. This morning, stocks opened modestly lower. Weighing on the market is a sharp fall in orders for durable goods orders in January, in part on weak orders from Boeing. Orders minus aircraft were strong.

The highlight of the first day of testimony was a sharp exchange between Bernanke and Sen. Bob Corker, a Republican of Tennessee, who accused the Fed chairman, among other things, of starting a currency war, punishing seniors with low rates, creating “faux” economic wealth, and being the biggest dove since World War II. Bernanke, visibly upset, pushed back. Alister Bull, a reporter for Reuters, had an interesting take on the testy exchange, saying that Bernanke’s dismissal of Corker’s concerns did not sound like someone planning to seek Senate support for a third term. The chairman’s second term ends in January 2014.

Besides the brickbats, the most substantive topic Corker seized on was the “optics” of the Fed’s eventual exit strategy. Bear with me for one second and I’ll have a go at explaining. Eventually, the Fed will eventually have to pay banks higher interest rates on the excess reserves parked at the central bank. It will not want the reserves to rush back into the economy, which could push inflation higher. Last week, St. Louis Fed President James Bullard and a prominent group of economists had highlighted this issue, fearing there could be a political backlash. This will amount to “billions and billions of dollars going to these institutions that, again, you regulate,” Corker said to Bernanke. But the Fed chairman’s response showed that politicians may have a hard time making traction on such a technical issue of higher remittances to banks. “None of the things you said are accurate,” Bernanke told Corker. “We’re paying exactly what they [banks] could be getting in the repo market, in the commercial paper market, anywhere else,” he added. Here is the link to the paper on the topic.

Lost in all the discussion of bond buying and the sequester was the economic outlook. Bernanke does not have a fresh Fed forecast to present to Congress. The last official Fed forecast was prepared in December and the next one won’t be ready until the Fed meeting on March 19-20. Bernanke told Congress that economic activity has continued at a moderate “if somewhat uneven pace.” He said that the recent increase in gasoline prices isn’t helping.

The new ranking Democrat on the House Financial Services Committee is Maxine Waters, who represents a district in South Central Los Angeles. In her statement, she backs the Fed’s easy policy stance. She notes that her predecessor, Rep. Gus Hawkins, helped write the law giving the Fed its dual mandate to combat both inflation and high unemployment.

Bernanke is reading his testimony, the same as yesterday’s. As we wait for the questions and answers, I’d like to take a moment to remember my colleague, Maya Jackson Randall, a reporter for the Wall Street Journal, who passed away this week after a courageous battle with a rare form of leukemia. There is a nice remembrance of Maya in this morning’s WSJ.

Rep. John Campbell, Republican of California, who has replaced Congressman, and presidential candidate, Ron Paul as chair of the panel’s monetary policy subcommittee, asks what it would take for the Fed to “call it quits” on its bond-buying program. Bernanke replies the program is always under review. It is working at the moment, the Fed chairman says.

Rep. Gary Miller, Republican of California, says insurance companies and mortgage companies are being hurt by continued uncertainty over the impact of some aspects of the Dodd-Frank financial regulation reform law. Bernanke says he’s up to speed on the issues and working on them.

Bernanke agrees with Rep. Carolyn Maloney, a Democrat fron New York, that the program reviewing foreclosures at big banks was flawed. Private contractors reportedly received more than $1 billion in fees for reviews while injured borrowers have not received any money. Bernanke said regulators have changed the program to cut out the contractors and borrowers would begin receiving checks in the next few weeks.

Bernanke succinctly sums up the bind that regulators find themselves in regarding Fannie Mae and Freddie Mac. Currently the two mortgage giants and the Federal Housing Administration are “pretty much the whole mortgage market,” he says. So shutting them down would restrict credit considerably. Over the longer run, policymakers need to come up with “a more acceptable set of institutions,” the chairman says.

Bernanke has a new argument to combat the charge that the Fed is punishing savers by keeping rates low. He notes that all G-7 nations have low interest rates comparable to the United States. “That says something about the fundamentals, which are very weak in most of these industrial countries. Until we can get greater forward momentum, we are not going to be able to see sustainable higher returns,” he says.

Rep. Scott Garrett, Republican of New Jersey, raps Bernanke for taking credit for the revival of housing in the last six months while denying that the Fed was behind the housing bubble that peaked in 2006. Can the Fed have it both ways? “Yes,” Bernanke responds, with a smile. Interest rates were 6% while the bubble was brewing, he argues, not a major factor behind the rise.

Could I tell people that the Fed chairman thinks sequestration is stupid? asks Rep. Michael Capuano, a Democrat from Massachusetts. “I wish you wouldn’t do that,” Bernanke replies, prompting a burst of laughter in the hearing room.

Rep. Brad Sherman, a Democrat from California, says that, without the actions of Fannie Mae, Freddie Mac and the Federal Housing Administration during the financial crisis, America would have ended up “somewhere between Greece and Thunderdome.”

Backbenchers on the committee are starting to ask Bernanke questions designed mainly to elicit answers that could be used to score political points. Rep. Michelle Bachmann, a Republican from Minnesota and a Tea Party favorite, asks Bernanke if the Fed is an overindulgent parent allowing the Obama White House to run up spending. Rep. David Scott, a Democrat from Georgia, wants Bernanke to say that Republicans should not support the sequester.

Rep. Steve Pearce, a Republican from New Mexico, invites Bernanke to a town meeting to talk to people who have mud on their boots and think they are being hurt because the Fed is printing money. Talk to my scheduler, Bernanke says. But he does not sound psyched.

Reader notes that I was incorrect in my report on the interest rate question. Rep. Mike Fitzpatrick, Republican of Pennsylvania, had asked Bernanke when the unemployment rate would fall to 6%. Bernanke said 2016. He wasn’t talking interest rates.

Rep. Bill Huizenga, Republican of Michigan, tries his hand at predicting the headlines from tomorrow’s newspapers about the hearing. He thinks they will be Bernanke calling for end of sequester. He wants them to be Bernanke calling for long-term budget fixes.

Rep. Sean Duffy, a Republican from Wisconsin, is the last member to ask questions. He says Bernanke is giving Obama cover to be irresponsible. The sequester will cost jobs and there are better ways to reduce spending, Bernanke replies. Get to know your congressmen: Duffy is a nationally recognized professional lumberjack athlete who appeared on The Read World: Boston, the sixth season of the MTV reality show.